Saudi Electronic University Value and Logistics Costs Options Discussion

Description

Purpose

The purpose of this assignment is to demonstrate your understanding of the concepts learned in this week’s lessons by responding to discussion questions.

Action Items

  • Access the discussion forum for this assignment by clicking on the assignment title.
  • Click on “Create Thread.”
  • Enter a title for your response in the “Subject” line.
  • Type your response into the message field to the following discussion prompt:
    • Review Chapter 3: Value and logistics costs
    • Pick 2 of the following discussion questions
  1. 1. Explain what is meant by the term value in a supply chain. How can value best be measured in a supply-chain context?
  2. 2. Why are processes important in terms of managing logistics? Suggest how the processes of a plan, source, make, deliver and return might differ in the case of the two factories Simple and Complex described in section 3.3.
  3. 3. What are the advantages of cutting the ‘total cost cube’ in different ways? Summarise the different perspectives on logistics costs provided by fixed/variable, direct/indirect and engineered/discretionary costs, and activity-based costing.
  4. 4. SuggestbalancedmeasurementportfoliosforthetwofactoriesSimpleandComplex described in section 3.3. In particular, suggest key performance measures in the areas of strategy, process and capability.

Unformatted Attachment Preview

Chapter 3
Value and
logistics costs
Content
Where does value come from
How can logistics costs be presented
Activity-based costing
A balanced measurement portfolio
Supply chain operations reference model
Where does value come from
• Key issues
1
2
How can shareholder value
be defined?
What is economic value
added, and how does it help
in this definition?
Where does value come from
• Business objectives
Business objective
Profit
Market share
Shareholde
r value
Social value
Where does value come from
• Concepts about shareholder value
– Comparable investment
– ROI (Return on investment)
– Sales
– Costs
– Working capital
– Cash and debtors
– Creditors
– Fixed assets
ROI＝
Sales revenue－Costs
Inventory＋Cash and Debtors－Creditors＋Fixed assets
Sales
revenue
－
Profit
Costs
Inventory
÷
＋
Working
capital
Cash and
debtors
－
Creditors
＋
Fixed
assets
Capital
employed
Return on
capital
employed
Where does value come from
ROI
Profitability = Profit / Sales
×
Asset utilization = Sales / Employed investment
ROI is underpinned by two main drivers:
✓Increased profitability
✓Increased asset utilization
Where does value come from
ROI and its key drivers
Level 1
Level 2
Level 3
Production costs / Sales
Net Profit
Sales
Level 4
Pay costs / sales
Materials / Sales
Selling costs / Sales
Pay costs / Sales
Administration costs / Sales
Pay costs / Sales
Property / Sales
ROI
Fixed assets / Sales
Plant / Sales
Vehicle / Sales
Sales
Total assets
Inventory / Sales
Current assets / Sales
Debtors / Sales
Cash / Sales
Where does value come from
Average inventory turnover
Key timerelated ratios
Average settlement period for debtors
Average settlement period for creditors
Content
Where does value come from
How can logistics costs be presented
Activity-based costing
A balanced measurement portfolio
Supply chain operations reference model
How can logistics costs be represented
• Key issues
1
2
What are the various ways of
cutting up the total cost
‘cake’?
What are the relative merits
of each?
How can logistics costs be represented
• Problems with traditional cost accounting
as related to logistics (Christopher, 1998)
– The true costs of servicing different customer
types, channels and market segments are
poorly understood.
– Costs are captured at too high at a level of
aggregation.
– Costing is functionally oriented at the expense
of output.
– The emphasis on full cost allocation to
products ignores customer costs
How can logistics costs be represented
Fixed
Variable
Engineered
Direct
Indirect
Discretionary
Three ways to cost cube
How can logistics costs be represented
Fixed / Variable costs
Fixed cost
Variable cost
Volume of activity
Volume of activity
How can logistics costs be represented
Fixed / Variable costs
Cost or revenue
Sales revenue
Break-even point
Total cost
Variable cost
Fixed cost
Volume of activity
How can logistics costs be represented
Fixed / Variable costs
Cost or revenue
Sales revenue
Cost or revenue
Sales revenue
Break-even point
Total cost
Total cost
High variable cost
Fixed cost
Break-even point
Fixed cost
Volume of activity
Low variable cost
Volume of activity
How can logistics costs be represented
Direct / Indirect costs
Direct labor
Direct costs
Direct materials
Whether the cost
can be directly
allocated to a
given product
Managing
director’s salary
Indirect costs
(overheads)
Administration
expenditure
Rent rates
How can logistics costs be represented
Direct / Indirect costs
• DPP (Direct product profitability) method
Gross sales for product group
⚫Less product-specific discounts and rebates
Net sales by product
⚫Less direct costs of product
Gross product contribution
⚫Less product-based marketing expenses
Product-specific direct sales support costs
⚫Less product-specific direct transportation costs
⚫Less product-attributable overheads
Direct product profitability
•Sourcing costs
•Operations support
•Fixed-assets financing
•Warehousing and
distribution
•Inventory financing
•Order, invoice and
collection processing
How can logistics costs be represented
Engineered / Discretionary costs
Example
Engineered
costs
Input-output
relationship
prevention
Quality cost
Discretionary
costs
appraisal
Internal and
external failure
Content
Where does value come from
How can logistics costs be presented
Activity-based costing
A balanced measurement portfolio
Supply chain operations reference model
Activity-based costing
• Key issues
1
What are the shortcomings of
traditional cost accounting from
a logistics point of view?
2
How can costs be allocated to
processes so that better
decisions can be made?
Activity-based costing
Today’s businesses are working in an
increasingly complex environment.
Use of Advanced Technology
Product Life Cycle
Product Complexity
Channels of Distribution
Quality Requirements
Product Diversity
Activity-based costing
Criticisms of Traditional Cost Allocation
• Assumes all cost is volume-related
• Departmental focus, not process focus
• Focus on costs incurred, not cause of
costs
Activity-based costing
Conventional Costing
• Total Cost = Material + Labour+ Overheads
• Overheads are allocated to the products on volume
based measures e.g. labour hours, machine hours,
units produced
Will this not distort the costing in the new
environment?
ABC provides an Alternative.
Activity-based costing
Allocation of indirect costs based
on causal activities
Results in better allocation
Does not provide “true” cost
ABC Purpose
Activity-based costing
• Traditional allocation method
Costs
Products
• Activity-based allocation method
Costs
Activities
First stage
Products
Second stage
Activity-based costing
When is ABC Most Useful?
•
•
•
•
High Overheads
Product Diversity or Multiple Products
Customer Diversity
Service Diversity
Activity-based costing
Example
Production line
A
B
C
D
Total
Machine hours
8,000
8,000
8,000
8,000
32,000
No. of changeovers
50
30
15
5
100
Equal allocation
250,000
250,000
250,000
250,000
1000,000
Allocation by activity
500,000
300,000
150,000
50,000
1000,000
Difference
250,000
50,000
-100,000
-200,000
0
Activity-based costing
• Cost time profile (CTP)
Cost-time profile
Cumulative cost (%)
120
delivery
100
loading
80
sort
60
processing
storage
40
20 transport
0
15
45
60
70
Cumulative time (hours)
75
85

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